Who wants to be an ISA millionaire?
Many of us know the value of ISAs. Individual Savings Accounts have been around since 1999, and for many of us they provide a simple and astute way to make the most of our spare cash; by letting it grow tax efficiently.
Being free of Income tax, Dividend tax, and even Capital Gains tax when they are cashed in, ISAs could be the bedrock of a wealth creation plan. Especially, as despite the name, you can invest as well as simply save with an ISA.
An ISA is a tax shelter for your savings where they escape tax on dividends, capital gains tax on any profits when you sell, as well as income tax as your money grows.
Your money could grow faster when the taxman cannot help himself to a share of it – as he will with savings and investments outside an ISA.
In fact, the advantages of ISAs are so great, the government sets strict limits on the amount you can put into them each year. This has been a relatively modest £20,000 for several years – a strict limit, but a substantial improvement on the £7,000 which was all that was allowed in 1999.
Some people have turned this relatively modest saving over the last 25 years into £1million+ nest egg that the taxman cannot touch. At the last count, there were nearly 5,000 Isa millionaires in Britain, and the top 25 have pots averaging an impressive £8.8m.
But the maximum that you could have invested using all the allowances since April 1999 up to and including Tax year 2024/25 is nearly £330,000. How is this possible?
The answer is time and patience – plus strategic investment and compound interest. Properly used, and depending on the type of risk you take, ISA investment has the potential to grow your wealth and may make you a millionaire too.
How you can make an ISA million
To potentially get to £1 million, you’ll need to consider making the maximum contribution to your ISA each year and look for Stocks and Shares investments.
Cash ISAs can potentially produce guaranteed returns, but sadly, the level of return they can offer is unlikely to reach the £million target in a realistic timeframe.
Stocks and Shares ISA investors, on the other hand, would need a 7% annual return on the maximum annual contribution to reach millionaires’ row in around 22 years. 7% is a good level of return, but it could be achievable with shrewd investment – and it might be possible to achieve even higher returns, although of course there can be no guarantees.
The potential millionaire ISA strategy
Here are some tips to consider:
1. Maximise your contributions. You’ll need to invest the maximum each year. This is likely to stay at £20,000 for several years to come – at least for Stocks and Shares ISA investment.
2. Diversify. Spreading the risk by spreading your investments is vital. Investing in funds can give you a much wider spread of investments, arguably reducing the impact on your wealth if any one of the many businesses you hold through them fails.
3. Commit to the long term. It is time that could help you build your wealth. Invest the maximum at the beginning of every tax year if you can and allow compounding to work its magic – if you reinvest any return your money earns in the first year it could start earning extra returns for you in the second year, and the process snowballs.
4. Review your portfolio. You need to choose your investments for the long term. Remember it is time in the market, rather than trying to time the market by chopping and changing your holdings. That said, it is still prudent to review how each of your assets is performing and adjust your investment choices accordingly.
5. Get expert help. Making the appropriate investment decisions about the funds and individual holdings you want for your ISA plans may be easier with some expert advice.
At Continuum we can advise you on a range of ISA providers and we can help you find the funds with the combination of potential and focus that are suitable for you.
So, if you answered yes to wanting to be an ISA millionaire, your very first step may be to call us. With a new tax year and a new ISA allowance to use, why not do that today?
Historical Annual ISA Allowances | The Motley Fool UK
How to become an ISA millionaire | AJBell
25 years of ISAs – how much could an investor have… | Charles Stanley
Individual Savings Accounts (ISAs): Overview - GOV.UK
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Stocks and Shares ISA’s do not include the same security of capital which is afforded with a Cash ISA.
The Financial Conduct Authority does not regulate taxation advice.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances. We recommend that the investor seeks professional advice on personal taxation matters.
Investors in ISA’s do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers. Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances.